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DoD's 2014 budget: Fewer civilians, higher retiree health fees

The Defense Department's topline would make a sharp recovery next year from the sequestration-level spending reductions of 2013 under the budget proposal President Barack Obama unveiled Wednesday.

The Pentagon requested a total of $526.6 billion for its base budget in 2014, roughly on par with what DoD asked for in 2013, but 7 percent more than what the department will ultimately get this year because of sequestration. The request also includes $88 billion as a "placeholder" figure for the military's wartime costs in Afghanistan, which have not yet been finalized because of pending decisions about U.S. military presence in the country next fiscal year.

The proposal also ignores the 10-year spending caps currently in effect under the 2011 Budget Control Act in the hopes that Congress and President Obama will strike a deal to repeal the law which created sequestration. Under the BCA, DoD's spending is limited to $475 billion next year, according to estimates by the Center for Strategic and Budgetary Assessments.

DoD Budget Proposal Highlights:

$526.6 billion for base budget

$88 billion for wartime costs

Exceeds Budget Control Act cap (set at $475 billion)

2 percent reduction to civilian workforce

1 percent pay raise for uniformed and civilian employees

TRICARE fee increases for retired military members

Calls for another round of BRAC in 2015

Defense Secretary Chuck Hagel, speaking to reporters shortly after the budget's release, said while it's not reflected in the spending plan, the Pentagon is keenly aware of the distinct possibility that sequestration will remain in place. A strategic choices and management review Hagel ordered last month is designed to account for various future funding scenarios and project how DoD would respond.

"I don't think anybody's minimizing the fact that sequestration is the law," he said. "But at the same time, as a representative government, we have an opportunity to get beyond that and hopefully find a budget resolution that will allow us not only some new flexibilities, but some new numbers. This is a $600 billion enterprise. You can't shift budget dynamics and planning in a month or two, so we are planning for every eventuality. We are living in a world of complete uncertainty."

However, even if Congress were to de-trigger sequestration and enact DoD's proposal as-is, the 2014 submission would spend about $7 billion less for the year than DoD had envisioned a year ago. To reduce that topline, the department proposed several changes to cut costs.

Among them, the civilian workforce would be reduced by 2 percent, from 777,151 full-time equivalents to 765,042 for a budget savings of $600 million. Next year's cuts would be only the beginning of a longer-term trim to civilian DoD employment over the Pentagon's five-year planning cycle: The department intends to reduce its civil servant payroll by five percent between now and 2018.

The Pentagon said the reduction might be achieved through early-out incentives and continued suspension of new hiring in certain areas, but that the military services and agencies would need to reshape their workforces to reflect the end of the Afghanistan war and increasing demands in areas such as cybersecurity and financial auditing.

"I would hope that given the time to prepare, we could do this through attrition, but we aren't far enough along to really know for sure how we'd do it," said Robert Hale, DoD's comptroller and chief financial officer.

As in all other areas of the federal government, the budget proposes a 1 percent civilian pay raise for 2014. Uniformed servicemembers would see the same pay increase, which represents a change in plans: DoD had previously planned to grant a 1.8 percent military pay raise to match the expected cost of inflation.

"The adjusted pay raise proposal was a tough decision reached by the senior leaders of the department after carefully weighing the other options for saving the $54 million generated by this adjustment," DoD officials wrote in their 2014 budget overview. "While this adjustment means that the average enlisted member will see a monthly increase in pay of $26 vice $47 beginning in January 2014, it also means that the department will not have to reduce military end strength by thousands of additional troops on top of the drawdown already planned."

Military members would also see an average increase of 4.2 percent in their basic allowances for housing, though the actual rates are set based on changes to the cost of living in a particular locality.

DoD is also making another run at increasing the share of health care costs borne by military retirees, an idea that's received a frosty reception among lawmakers for the past several years. The 2014 budget includes a slightly modified version of the means-tested fee increases Congress rejected last year: Retirees in the TRICARE health insurance system would be charged based on a percentage of their retirement pay.

For TRICARE Prime, DoD's HMO-like option, the fee would be 2.95 percent of gross retirement pay for 2014, with premiums capped at $750 per year for most retirees and $900 per year for retired generals and admirals. The fee would gradually rise before reaching 4 percent in 2017, with a cap of $1,800 a year for flag officers and $1,200 for everyone else.

Other changes to health care costs include a new annual enrollment fee of $140 for family coverage under TRICARE Standard, DoD's fee-for-service option. Fees would also be assessed for the first time in the TRICARE For Life Program, the supplement "medigap" plan for Medicare-eligible military retirees. That fee would be set at 0.5 percent of retired pay in 2014, rising a quarter of a percentage point per year before reaching 2 percent in 2017.

The Pentagon will again ask for permission to shed excess infrastructure through another round of base realignments and closures (BRAC) in 2015, another proposal Congress rejected last year. Unlike last year, however, DoD is proposing funding to cover the up-front costs associated with closing facilities: $2.4 billion over the five-year future years defense program (FYDP).

Hale said despite almost universal opposition on Capitol Hill to the prospect of further base closures, the department decided to press forward with yet another request, because it cannot achieve its needed cost savings while maintaining real estate and buildings it does not need.

"My sense is you ask, you ask, and you ask again. The answer is no, no, no, and eventually you get to okay," he said. "I don't know if we're at okay yet, but we have to keep asking. We know we need it. It's the only effective way to consolidate infrastructure. I think it would be irresponsible for us not to go up there and say, Ďas part of a package, we need you to let us do this.' Congress passed a law that stated we have to reduce civilian personnel roughly in proportion to military personnel. We can't do that without things like BRAC and the ability to restructure some of our military treatment facilities, because that's where a lot of our civilians work. We have to eliminate the requirement before we eliminate the people."

DoD did not propose further changes to retirement compensation, instead saying it supports the commission Congress created in the 2013 Defense Authorization Bill to study proposed reforms. The law does not require Congress to actually vote on the panel's recommendations, however, and officials cautioned against letting its work "be relegated to an ever-growing list of esoteric compensation studies and reports."

Other cost saving proposals include:

$200 million reduction to Defense-wide travel and service support contracting

$2.2 billion reduction in Air Force construction projects

$400 million reduction to Army military construction projects

Several weapons system cancellations, delays and reductions, including the Precision Tracking Space System, the Army's new Apache helicopter, and the service life extension program for the Navy's legacy F/A-18 fleet.

A restructuring of military treatment facilities

Certain areas of the budget would see increases from what was enacted for 2013. Cyberspace operations, for example, would get a 0.8 percent funding boost for a total of $4.7 billion. The Pentagon is also prioritizing the acquisition of several weapons platforms, including the Virginia Class submarine, the C-130J cargo aircraft, precision munitions and the Evolved Expendable Launch Vehicle.

The budget also prioritizes contract management and oversight, primarily by the Defense Contract Audit Agency and the Defense Contract Management Agency.
Together, DCAA and DCMA would add about 650 full-time equivalents to their workforces and an extra $100 million in funding compared to the 2013 request.

"My sense is you ask, you ask, and you ask again. The answer is no, no, no, and eventually you get to okay," he said. "I don't know if we're at okay yet, but we have to keep asking. We know we need it. It's the only effective way to consolidate infrastructure. I think it would be irresponsible for us not to go up there and say, Ďas part of a package, we need you to let us do this.' Congress passed a law that stated we have to reduce civilian personnel roughly in proportion to military personnel. We can't do that without things like BRAC and the ability to restructure some of our military treatment facilities, because that's where a lot of our civilians work. We have to eliminate the requirement before we eliminate the people."